The ratings on San Francisco, Ca.-based The Gap Inc. reflect management's challenge to improve the business fundamentals of its three brands in an industry that will continue to experience intense competition, and to improve weakened credit protection measures. These factors are offset in part by the company's strong business position in casual apparel, geographic diversity, and strong cash flow. The Gap's operating trends are recovering after declining significantly in 2000 and 2001. The operating margin improved to 22.1% in the first half of 2003 from 16.7% for the same period of 2002, and to 18.2% in 2002 from a weak 14% in 2001. Return on permanent capital rose to 19% in the first half of 2003 from a weak 7.4%
